Standard & Poors Corp. revised its outlook to negative from stable and affirmed all its ratings on Foot Locker, including the ‘BB+’ issuer credit rating. The rating agency said the retailer will face significant top-line headwinds this year, as restrictive government mandates to contain the coronavirus pandemic lead to temporary store closures, deflated consumer confidence, and a swift and severe drop in discretionary consumer spending.
As a result, the rating agency said Foot Locker’s operating performance and credit metrics will likely trend weaker than S&P Global Ratings’ previous expectations through the remainder of the fiscal year, before rebounding in 2021.
The negative outlook reflects the potential for a lower rating if performance comes under further pressure, potentially because of an extended disruption to consumer spending or a weaker-than-expected subsequent recovery that hinders the company’s ability to restore credit metrics in fiscal 2021.
S&P said in its statement, “Severely pressured operating results will deteriorate credit metrics significantly this year. In response to the coronavirus outbreak, Foot Locker temporarily closed a majority of its stores in Hong Kong and Italy in February and all its stores across North America, Canada, and the remainder of Europe from mid-March. Closures could continue for an extended period given government actions to quell the rapid rise in new COVID-19 cases. While Foot Locker’s online channel remains operational, it represents only a modest percentage of total revenues (about 15%) and current products lack newness given the pause on new merchandise releases. In addition, we believe consumer demand will be significantly depressed over the next few quarters as confidence rapidly declines due to a steep recession and elevated unemployment. As a result, we see leverage spiking above 3x at the end of fiscal 2020 (ending Feb. 1, 2021), up from the mid-1x area at the end of fiscal 2019 (ended Feb. 1, 2020). As pressures alleviate beginning in the second half of calendar year 2020, we expect a gradual improvement in Foot Locker’s credit metrics, with leverage declining to 2x or less at the end of fiscal 2021.
“The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus pandemic and impending recession on Foot Locker’s financial condition. A prolonged store closure, coupled with a slowdown in consumer spending, could affect the company’s ability to recover operationally and maintain leverage below 3x in the next one to two years.
“We could lower the rating if we expect Foot Locker will sustain leverage above 3x. This could occur if the impact of the coronavirus and subsequent recessionary macroeconomic environment are more severe and prolonged than we currently expect, delaying operating performance improvements in the second half of the year. We could also lower the ratings if Foot Locker underperforms significantly due to material merchandising missteps, a lack of consumer demand (especially for Nike products), and increased competition. Under this scenario, we may conclude that the company’s competitive standing and operating efficiency have weakened, leading us to assess its business less favorably.
“We could revise the outlook to stable if we expect the company to maintain leverage of less than 3x. If the company is able to recover from the impact of the coronavirus and we are confident the company can maintain its appeal to consumers in a recessionary environment, we would expect sales and earnings to stabilize at the end of this year and further rebound in 2021. In addition, we would have to believe macroeconomic conditions are more stable and the threat of the coronavirus pandemic has subsided.”
Photo courtesy Foot Locker